This subject just won’t go away it’s a discussion that takes place on so many forecourts when dealers receive their latest management accounts: "You’re telling me that my business is profitable, but I never have any cash, and my bank account is always overdrawn. One of us must be getting something wrong." The reality is, of course, that neither is wrong. It’s entirely possible for a business to operate with normal levels of profit, but suffer from poor cash flow.

THE real EFFECTS OF Cash flow

To show the effects of cash flow, we’ve focused on a single ’event’ on a petrol retail site the arrival of a tanker full of fuel, the sale of that fuel and the subsequent effect on the business’ bank account.

The result is the chart that you can see below. We’ve called it The Pulse. Hopefully this illustrates just how something that creates a profit can still cause an overdraft.

It may seem a little abstract, but it’s real in the sense that the underlying accounting data has been taken from a number of different dealer-operated sites around the country, using ’real’ sales and payment terms.

And no, this isn’t a ’worst-case’ scenario: far from it.

Underlying figures

First, let’s be clear about the underlying figures from our composite dealer site:

Sells 12,000 litres a day (the petrol/diesel sales mix can be ignored for this example).

Starts and ends with zero fuel stock, so there’s no stockholding bias to the figures.

Buys a single tanker of 36,000 litres on day one and sells all the fuel in three days.

Fuel is bought on typical DD terms third working day after delivery.

Makes a flat 3ppl margin off invoice and we’re ignoring any reduction in margin due to fuel card commissions, etc.

Does not give any local ’credit’ to customers.

Banks all of its cash on the next working day, into its own bank branch.

Payment pattern

The customer payment pattern is:

Cash sales 29%

Charge card sales 3%

Fleet card sales 18%

Debit card sales 50%

All debit card sales hit the bank account on the third working day after sale.

We’ve started with a zero bank balance on day one.

The single fuel price we’ve used happens to be 138.9ppl the absolute value doesn’t really affect the pattern that we’re seeing.

Dates used (1st-31st) are from August 2012; obviously different months have different weekends, but August is as ’real’ as any other month so we’ve used that one.

What you’re seeing

The blue line shows the money received for the fuel (and the money used to pay for the tanker) as it flows into and out of the bank. The red line shows the resulting bank balance on a daily basis.

For the first few days, the blue line is positive as the cash portion of the sales is put straight into the bank account and the red line shows a positive bank balance over the first weekend (up to day five). Then on day six (Monday) the DD for the tanker goes out of the bank, and although there is still some money coming in at the same time, the overall effect is to push the bank balance down to an overdraft of £24,000. On days seven and eight, the first receipts come through from the charge card sales. This reduces the bank overdraft a little, but the account is still in the red. On day 16, the first of the fleet card sales hit the bank account and finally the red line is back to zero. On day 23, the remainder of the fleet card sales get to the bank, and we see the bank balance go above zero. In practical terms, our dealer hasn’t seen the ’profit’ from the tanker of fuel delivered on the 1st as money in his bank account until the 23rd of the month.

Best case scenario

Let’s remember that this is almost a ’best case’ scenario. We’ve ignored any delay to banking cash sales say by paying into a different branch, let alone a different bank.

We’ve ignored rejected cards or polling malfunctions; and we’ve assumed a nice constant daily sales level with no peaks or troughs over weekends. This is about as quickly as you can turn sales into cash under the current trading terms faced by most dealers.

Although there isn’t space here to show the effects, we’ve repeated the exercise for a whole month’s worth of sales. Extend the calculations for The Pulse over a whole month and you begin to see how a profitable forecourt selling 12,000 litres a day might still need an overdraft facility of £120,000 during the course of a month!